Gretchen Whitmer’s Middle Class Tax Hike Doesn’t Get As Much Coverage As Blue State Wealth Tax Bills, But Is More Likely To Become Law

Michigan Governor Gretchen Whitmer (D) wants to prevent her state’s income tax rate from dropping from 4.25% to 4.05%, as is expected happen later this year, and she’s close to getting her way. House Bill 4001, legislation that would cancel the planned income tax rate reduction, which is facilitated by revenue triggers enacted in 2015, passed out of the Michigan House on February 9 and will soon be taken up by the Senate. If approved by the Senate, the income tax burden for Michigan residents will rise by nearly half a billion dollars annually compared to current law.

Instead of letting Michigan’s flat personal income tax rate permanently fall from 4.25% to 4.05%, Governor Whitmer and legislative Democrats instead want to send a $180 inflation relief check to every taxpayer. Governor Whitmer also wants to increase the Earned Income Tax Credit and exempt pension income from state income tax.

“When you add up all the different pieces of relief, what you see here is a real effort to make sure that we are strategically helping people that are struggling,” Whitmer said at a February 6 press conference. Republican legislators and other critics of Whitmer’s tax plan disagree.

At a recent press conference, Michigan House Minority Leader Matt Hall (R) derided Whitmer’s tax plan as insufficient, saying “the governor is trying to create a false choice.”

“We are sitting on a $9 billion surplus,” Representative Hall added. “Michigan families do not have to choose between immediate relief and a permanent income tax cut.”

With her tax package, which would raise taxes on millions of Michigan households and hundreds of thousands of small businesses that file under the individual income tax code, Governor Whitmer is seeking to take fiscal policy in the opposition direction compared to that of her Democratic counterpart in Connecticut. There Governor Ned Lamont (D-Conn.) has proposed a rate reduction for the bottom two of Connecticut’s seven income tax brackets.

While Governor Whitmer is seeking to raise income tax rates at the same time Governor Lamont is proposing to cut them, she’s not an outlier among Democratic governors. In fact, governors and lawmakers in eight blue states introduced coordinated tax increases in January that are designed to target wealthy and upper income households.

There is an inverse relationship between the amount of media coverage these pending state tax hikes are generating and their likelihood of becoming law this year. Though Whitmer’s proposed tax hike for all income levels is getting far less press coverage than the coordinated blue state wealth tax initiative, Whitmer’s income tax increase is much more likely to become law, at least in the near term. If approved by the Michigan Senate this week, the income tax hike will head to Whitmer’s desk to be signed into law.

The blue state wealth tax proposals unveiled in January, though they have generated many headlines, are a long ways from enactment. Take Assembly Bill 259, the wealth tax bill introduced in California by Assemblyman Alex Lee (D). AB 259 is a modified version of wealth tax legislation introduced in the California Assembly back in 2020, which failed to pass out of either chamber of the California Legislature.

AB 259 seeks to impose an annual 1.0% tax on worldwide assets exceeding $50 million. Net worth exceeding $1.0 billion would be taxed by the Golden State at a 1.5% annual rate. Assemblyman Lee’s bill levies a heftier tax rate that the previous wealth tax bill introduced three years ago, which would’ve imposed a 0.4% tax rate on global net worth above $30 million.

Governor Gavin Newsom Opposes Prospective California Wealth Tax

When asked why he thinks this new wealth tax bill can succeed where the previous proposal failed, Assemblyman Lee’s office did not respond. Back in 2020, Governor Gavin Newsom said a wealth tax is “not part of the conversation” and that such proposals were “going nowhere” in Sacramento. Newsom’s staff confirmed with this author on February 15 that the Governor remains opposed to a prospective state wealth tax.

Eight states, including California, are reported to be part of the organized blue state wealth tax initiative. Yet lawmakers in only half of those eight states filed legislation that would impose an actual wealth tax that applies to intangible assets or a tax on unrealized capital gains. Lawmakers in the other four states filed a combination of standard income tax hikes on high earners and capital gains surtaxes.

Of the four states where wealth tax legislation has been filed — California, Hawaii, Illinois, and Washington — Hawaii’s wealth tax bill is the only one that applies to in-state assets. The wealth tax bills filed in California, Illinois, and Washington would be assessed on global assets.

When he was a member of the California Assembly during the debate over the 2020 wealth tax bill, Congressman Kevin Kiley (R-Calif.) warned his then colleagues in Sacramento that their attempt to tax assets outside of the state, aside from the constitutional issues, “will of course make people leave California.”

“As a heads-up to my colleagues proposing the Wealth Tax Act, the U.S. Constitution is still in force here,” Kiley warned in 2020. “You can’t keep taxing people after they flee the state.”

Blue state lawmakers recognize that many taxpayers targeted by wealth taxes will adjust their behavior and change their primary residence so as to avoid the new levy, which is why they rolled out their proposals in a coordinated manner. “We want to send a message that there is nowhere to hide,” said Illinois Representative Will Guzzardi (D), explaining the orchestrated, multi-state rollout of tax increases targeting the wealthy and upper income filers. Representative Guzzardi has proposed applying his state’s 4.95% personal income tax to the unrealized capital gains of taxpayers whose net worth exceeds $1 billion. Assemblyman Alex Lee, sponsor of the California wealth tax bill, said the multi-state approach “is kind of the strategy of ‘You can run but you can’t hide.’”

The problem for Representative Guzzardi in Illinois, Assemblyman Lee in California, and other lawmakers seeking to impose the nation’s first wealth tax is that there are plenty of places in the U.S. where taxpayers can escape the clutches of tax collectors in Sacramento, Springfield, Albany, and other blue state capitals. Florida, Tennessee, Texas, North Carolina, and Arizona, along with other red and purple states that have attracted hundreds of thousands of former blue state denizens in recent years, will become an even more attractive option for well heeled Californians, New Yorkers, and other blue state residents fed up with high and rising state tax burdens.

Contrary to Representative Guzzardi’s assertion, not only are there plenty of states where his constituents can move in order to avoid his proposed wealth tax, the red states that stand to be the top recipients of blue state wealth tax refugees are governed by lawmakers who are working to lower tax rates and make their state tax codes even more competitive.

Tennessee, for example, is home to the third lowest average tax burden in the nation and is one of only eight state that funds government without an income tax. Such a hospitable tax climate has helped Tennessee attract thousands of new residents from higher-taxed blue states in recent years. Not resting on his laurels, Tennessee Governor Bill Lee is seeking to make the Volunteer State’s tax code even less burdensome and more competitive than it already is. Governor Lee is proposing a tax plan that features relief for employers. Lee’s tax package, if enacted, would increase the job-creating and sustaining capacity of businesses that operate in Tennessee.

Meanwhile in two other no-income-tax states, Florida and Texas, lawmakers are working to enact further tax relief this year. Texas Governor Greg Abbott is proposing the largest property tax cut in state history, while Florida Governor Ron DeSantis has proposed a tax relief package intended to reduce household costs. In North Carolina, another state that has attracted many people from the blue states currently considering wealth taxes and other tax hikes, the corporate tax will be totally eliminated by the end of this decade and leadership in the General Assembly has announced they’re seeking further personal income tax rate reduction this year, possibly taking the rate as low as 2.5%.

Despite Representative Guzzardi’s assertion, there will be plenty of places for Americans to escape wealth taxes enacted in Illinois, California, Maryland, New York, or any other state. The abundant opportunity for avoidance is why a wealth tax, should a state enact one, is not expected to be a stable and reliable source of revenue. The experience with wealth taxes in Europe supports this.

Over the past 60 years a dozen European nations imposed wealth taxes, but only three still do so today. Those European wealth taxes were repealed with lawmakers acknowledging the unintended consequences and economic damage caused by such levies.

“The lessons from other countries’ experiences with wealth taxes should inform policymakers in the U.S. as they consider such a proposal,” writes Tax Foundation president and CEO Daniel Bunn. “With so many countries having adopted and then abandon a wealth tax, perhaps the U.S. should avoid adopting one in the first place.”

The most recent wealth tax repeal occurred in France after a five year experiment. “My predecessor taxed the wealthiest and those who succeeded like never before,” French President Emmanuel Macron said in 2017, explaining his decision to repeal wealth tax. “What happened? They left.”

“The constant across all seven states, or wherever such taxes are proposed: wealth taxes are economically destructive, their base is almost impossible to measure accurately, and they create perverse incentives and promote costly avoidance strategies,” writes Jared Walczak, an economist at the Tax Foundation, adding that “very few taxpayers would remit wealth taxes—but many more would pay the price.”

Time will tell whether any of the pending wealth tax bills are able to pass in the Democrat-dominated legislatures where they’ve been proposed. It’s expected that many if not all will suffer the same fate as the previous California wealth tax proposal, which didn’t even get a floor vote in a legislature with Democratic supermajorities. While blue state wealth tax proposals have garnered national headlines, they face uncertain futures. Meanwhile Gretchen Whitmer’s proposed income tax increase, which would hit all income levels, could become law this month.